Sustainable North American oil boom would have complicated impact on OPEC

The steady increase in US oil output of recent years, especially as a result of shale oil exploitation, has not gone unnoticed by OPEC. But is it sustainable?

That was a question posed rhetorically by OPEC Secretary General Abdulla ElBadri in late October on the sidelines of a Gulf Intelligence energy forum in Muscat, Oman. Expanding on the issue, he said it remained to be seen whether US and Canadian crude production could be maintained at current levels, let alone increased, implying that it was too early for OPEC to start worrying seriously about any potential impact to the market call on the organization’s crude.

ElBadri’s comments are at least a little reminiscent of the position previously taken by Russian gas giant Gazprom on US shale gas, when its top officials repeatedly played down the potential for increasing North American gas supplies to have a knock-on effect on European dependence on Russian gas. Yet, with competing international gas suppliers such as Qatar diverting LNG cargoes from North America to Europe, that clearly has happened.

Nonetheless, ElBadri is far from the only noted energy expert currently dismissive of prospects for unconventional North American oil supplies to have a long-term impact on global markets.

At a previous Gulf Intelligence forum in Dubai in September, for instance, veteran analyst Fereidun Fesheraki, chairman of FACTS Global Insight, made light of the potential for rising Canadian heavy crude production capacity to have a lasting impact on the global oil market, characterizing it as expensive and “subsidized”.

Expensive by the standards of conventional onshore oil extraction, a Canadian official attending the Dubai forum agreed, but “subsidized” was a misconception, he told Platts. The official noted that neither the Canadian federal government nor individual provinces currently subsidize commercial oil and gas operations, including oil sands and other heavy crude production. They merely impose taxes at higher or lower rates on intrinsically profitable extractive ventures .

Industry insiders with specialist insight into the US shale gas and oil booms have convincing technical arguments with which to rebut the views of shale skeptics. One such is Schlumberger’s John Daniels, an expert in shale drilling and well stimulation. In a recent presentation in Abu Dhabi to the Emirates Society of Geosciences, he explained not only why such skepticism exists, but also why it is probably misplaced.

Asked whether US shale oil production was sustainable, Daniels’ answer was an unequivocal yes. “We’re at a cusp. It’s only going to go up,” he said.

The same held for North American shale gas production, despite vocal opposition from certain environmental groups, Daniels added, confidently predicting that the US would “soon” become an LNG exporter.

“I think it will happen because of the size of the resource in place and the (local) familiarity with it,” he said. “There’s still a lot of room for improvement here, and producers are going to be forced to become more effective with their exploration and production dollars.”

With regard to shale oil plays such as North Dakota’s giant Bakken field, producers had yet to commence serious efforts to reduce their environmental footprints by maximizing operational efficiency while reducing consumption of sensitive resources such as water. Once they did so, pressure from the environmental lobby would ease, Daniels predicted.

In the past, he explained, US oil and gas producers had taken a scatter-gun trial-and-error approach to choosing drilling sites on shale formations and applying well stimulation techniques such as hydraulic fracturing (fracking). With a high incidence of errors–drilling in the wrong place or designing a suboptimal stimulation program–well costs could be several times higher than for conventional production, with similar results for other key variables such as water consumption.

With a few exceptions, initial output improvements achieved by switching to horizontal from simpler, less costly vertical drilling, fell off quickly, leading to widespread skepticism about the sustainability of production levels in most shale operations.

The situation has generated a compelling need for better understanding of reservoir geology and how it affects fracking, which technology-based oil and gas services companies such as Schlumberger are now providing. Drilling the a reservoir’s sweet spots — locations maximizing the combination of reservoir quality and well-completion quality, or the presence or absence of formation water — is key.

Schlumberger currently has a model that can reliably predict from well log data where to drill the first five wells, Daniels said. The approach has already produced a 33% efficiency gain at Texas’ Eagle Ford shale.

Other technology advances related to well design and stimulation, all aimed at maximizing reservoir contact, may be especially helpful to Middle East states that are seeking to exploit shale gas and other unconventional gas resources. In Egypt, consumption of water at one such project has been cut by 30%, and by as much as 50% for the use of proppant used to keep reservoir fractures through fracking, Daniels reported.

“There is a huge amount of source rock down there that can be exploited,” he said with respect to potential Middle East and North Africa region shale gas resources.

Regarding heavy crude production, which is becoming an increasingly important part of Middle East oil output, there is more good news from the technology front.

In Dubai in October, Daniel Christian, a senior executive of utlilities pipe and services company Victaulic, demonstrated how a weldless modular pipe system widely used at Canadian oil sands operations could also have advantages for transporting mixtures of oil, water and sand pumped from mature fields in the region. One big advantage is that line sections held together by a groove system can be rapidly disconnected for cleaning and reconnected afterward, allowing passive separation of sand from fluids during transportation.

The bottom line for OPEC producers, therefore, is that the currently rising tide of North American unconventional crude may not start to ebb any time soon, but that technology adopted by US and Canadian onshore producers can also help keep MENA and other OPEC producers competitive. At the same time, exploitation of MENA shale gas resources could help some OPEC members, including Saudi Arabia, displace some of their increasing domestic oil consumption with gas.

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Comments

Syeda at April 19, 2014 2:21 pm

Don’t look now, but nat gas is up 65% since it bottomed a cuolpe of months ago at $1.85.Yeah, but a gain of 65% off a historical low is still $3.05, still down nearly 50% from last year.Besides, this has been an abnormally hot summer. Electric demand has risen due to more people running a/c, which means more demand for natural gas in the electric producing sector.And are you really surprised Texas natural gas production is down? Most of what is making its way to the natgas market is the byproduct stuff that comes from oil drilling. Something like 30% of rigs are producing natural gas. Can’t make money at $1.50 per. If prices are to remain above $3.00 (the low end of BE point), you’ll probably see some rigs come back on-line, but we’ll likely see this oversupply remain, simply because we have so much inventory to get through first.

Schlumberger’s John Daniels, an expert in shale drilling is naive. Fracking’s environmental benefits are, and will be, overwhelmed, by the anti carbon combustion interests. These powerful forces have zero interest in technology; they are anti technology. They are motivated by a few who make a good living stirring the boiling pot, and millions to whom environmentalism has replaced religion. One axiom is that all large corporations are, per se, corrupt, and must be destroyed. People hate fracking simply because Schumberger does it; they actually hate capitalism. If Schumberger developed a technology which combusts carbon, but did not produce CO2 (an impossibility), they would not stop. They are motivated by hate, not reason. And they are hold power in the West. This alone explains the many year delay in the XL pipeline border crossing, and the hatchet job on a fifty year old technology, fracking.

The resolution of the conflict will be defined among sellers and buyers, OPEC and Asia, the two extant and growing poles of economic power. Mexico and Canada will look east for markets. The US’s policy on carbon combustion is unsustainable, but is unknown. The big wild card is Iran or North Korea starting an atomic world war, which will knock all the dominoes over.

Yes. Fracking of vertical wells (conventional drilling) is an old technology. But fracking in shale formations of multiple horizontal wells with huge amounts of our potable water that will be gone forever after fracking, is NEW (only viable since around 2006 in the Barnett Shale). It’s all going on inside our neighborhoods, to boot. And you must know that if you are truly a PE. And they sold it to our communities in North Texas as a perfect science, CLEAN energy and we would never know they were conducting these heavy, industrial mining operations. Oh, and everyone was going to get rich quick from it ~ all deceptions of the highest order. And let’s not forget the pipelines…one more public safety issue that our local municipalities and state agencies have little capacity to address.